Making good business decisions? Directors & Officers’ insurance still matters

By Jack Durrant, Associate Director, BA (Hons) ACII

Big news: another business is notifying the public of its intent to sell, followed by a swift change to appoint administrators just some short months later. [We’ve heard it all before], certainly more-so after COVID. In fact, I’m starting to struggle to keep count of the tribulations of businesses throughout the UK economy, buoyed by the fact that Credit insurance markets seem to be becoming harder – yet further embedding the cash flow exposure issues businesses face.

Do you remember Carillion?

In 2018, Carillion’s issues subsequently dragged KPMG into a legal battle over financial mis-statement which should have been detected. Then, in 2020, Arcadia (the parent group of well-known brands like Topshop, Burton and Dorothy Perkins) entered administration, briskly followed by the discovery of a pension deficit to the tune of a reported £350m. The public relations fall out for finances and PR was devastating for the business and the former owners. Most recently, I’ve seen the trouble in which Lisa Wilkinson finds herself – she’s at the centre of an investigation which again is looking into her contributary actions to yet another pension shortfall and the loss of 12,000 jobs.

This isn’t just limited to huge nationwide firms either. Lots of smaller firms suffer because of financial difficulty, rising costs, raising interest rates and even other firms in their supply chains failing, bringing them down too in the process. County Court Judgments (CCJs) are up 157% – and this will be down to the overall challenges in the economy. Carillion, for example, was at the heart of a huge eco-system of businesses within their supply chain, some of whom struggled, some of whom collapsed with them – now those businesses make up the companies house defunct entity statistics most people likely account to COVID or Brexit.

The thing with these sorts of issues is that the court of public opinion can add an extra layer of complication, particularly where there are issues of family or multiple stakeholders. In these cases, public opinion can often win over various stakeholders, effectively meaning the defendants lose before court hearings even start.

So how can business decision makers ensure they are protected when overarching market forces overwhelm their business and they must appoint administrators?
 

What you should consider

There are a couple of things that business leaders should bear in mind:

• No one makes perfect decisions all the time, but that doesn’t stop claims
• Even the very best of decisions would be interrogated in court in the event of a loss.

I often urge my clients to consider their Directors & Officers’ (D&O) cover, yet I was astonished at the podcast we released on the topic which highlighted the broad nature of D&O claims and the fact that one might not necessarily do anything wrong and still need protection. The added benefits that come with some policies like pension trustee liability or public relations cover are viable ways for insurers to win customers – the covers are more useful than they appear to your average buyer.
 

So how can you defend yourself?

In the event accusations are made, the first thing business leaders might do is to raise funds to protect themselves (and potentially their assets) should issues go to court. This being said, many who do not buy cover do not know that their personal assets are at risk should a claim be mounted against that director directly. Say for a failing of health and safety – if you’re the person on record who is responsible, then you’re potentially personally vulnerable. Even in the event you as a H&S manager make all of the correct decisions, what does your defensibility look like? Even if you simply contributed to business decisions – I would also suggest there is exposure for you.

Courts might investigate lots of aspects in the event of an incident and HSE are extremely thorough. You could find yourself having to answer:

• What actions and decisions led to that outcome?
• Who was involved?
• Why did you make the decisions you did?
• How rigorous was the testing of your H&S policies?
• When did they last get reviewed?
• Do you believe that the H&S policy was at the required standard?

This is just the obvious stuff that someone like myself, who’s not involved in litigation work, might suggest to potential defendants at trial, so it’s important to have a well-equipped legal team to prepare documents, and assist you in mounting a defence. On the surface those questions seem innocent enough – but there are so many mis-steps that one could make if you’re not adept at giving all of the required information. This itself is costly, in fact lawyers can charge uncapped fees, and you’ll certainly want a properly qualified and tested lawyer when potentially huge fines and prison sentences are a gavel strike away.
 

Be prepared, just in case

With that in mind, there are a few things that business decision makers must do to reduce their exposure:

• Ensure you have the means to mount an adequate defence by keeping minutes of meetings, having great training and fundamentals around decisions and, where required, get the buy in of your fellow directors – think about your defensibility
• Buy a high-quality D&O policy, making sure you add in extensions for things like employment legal practices and entity defence where you need them
• Ask your broker about what limits you can buy, and maybe even understand examples of where your D&O can protect you and the costs to other business who have had to utilise their policies, or those that have been dragged through a legal battle themselves to benchmark your own requirement for cover.

Directors and Officers isn’t a compulsory purchase, but alongside that which you are legally required to insure, I would implore you to review this cover as just as essential.

References

https://www.bbc.com/news/business-55162481
Carillion: KPMG hit with £1.3bn government lawsuit over audit - BBC News
Number of firms in critical financial distress rises sharply - BBC News